Q3 2023 Knowles Corp Earnings Call

Speaker 1: Thank you for standing by. My name is Kayla Baker and I will be your conference operator today. At this time, I'd like to welcome everyone to the NOAA's third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.

Thank you for standing by my name is Kayla Baker and I'll be your conference operator today.

This time I would like to welcome everyone to the Knowles third quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent any background noise.

Speaker 1: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question again, press the star and one. I would now like to turn the call over to Vice President of Investor Relations, Patton Hofer.

After the Speakers' remarks, there will be a question and answer session.

If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star and one I would now like to turn the call over to Vice President of Investor Relations patent Ofer.

Thank you Kayla and welcome to our Q3 2023 earnings call.

And then hope for Vice President of Investor Relations.

With me on the call today are Jeffrey <unk>, our president and CEO and John Anderson, Our senior Vice President and CFO.

Speaker 2: Our call today will include remarks about future expectations, plans, and prospects for NOLS, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities law. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses, and profits, and involve a number of risks and uncertainties that can cause actual results to differ materially from current expectations.

Our call today will include remarks about future expectations plans and prospects for Knowles, which constitute forward looking statements for purposes of the safe Harbor provisions under applicable Federal Securities Law forward looking statements. In this call will include comments about demand for company products anticipated trends in company sales expenses and profits and involve a number of <unk>.

And uncertainties that can cause actual results to differ materially from current expectations.

Speaker 2: The company urges investors to review the risk and uncertainties in the company's SEC filings, including but not limited to, the annual report on Form 10-K for the fiscal year ended December 31, 2022, periodic reports filed from time to time with the SEC, and the risk and uncertainties identified in today's earnings release.

The company urges investors to review the risks and uncertainties in the company's SEC filings, including but not limited to the annual report on Form 10-K for the fiscal year ended December 31 2020 to.

Periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release.

Speaker 2: All forward-looking statements are made as of the date of this call, and NOLS disclaims any duty to update such statements except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at nolss.com and in our current report on Form 8K filed today with the SEC, including a reconciliation to the most directly comparable GAAP measure.

All forward looking statements are made as of the date of this call and Knowles disclaims any duty to update such statements except as required by law.

In addition, pursuant to Reg G. Any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at Knowles Dot Com and in our current report on form 8-K filed today with the SEC, including a reconciliation to the most directly comparable GAAP measures.

Speaker 2: All financial references on this call will be on a non-GAAP continuing operation basis unless otherwise indicated. Also, we've made selected financial information available in webcast slides, which can be found in the investor relations section of our website. With that, let me turn the call over to Jeff who will provide some details on our results. Jeff, thanks, Pat. Thanks to all of you for joining us today. Those delivered solid third quarter results with earnings and cash flow above our expectation.

All financial references on this call will be on a non-GAAP continuing operations basis, unless otherwise indicated also we've made selected financial information available on webcast slides, which can be found in the investor Relations section of our website with that let me turn the call over to Jeff who will provide some details on our results Jeff.

Thanks, Pat and thanks to all of you for joining us today.

<unk> delivered solid third quarter results with earnings and cash flow above our expectations.

Speaker 2: Revenue of $175 million was in line with guidance while adjusted EBIT margins of 21%, EPS of 31 cents and cash from operations of $40 million finished above the high end of our guidance rate.

Revenue of $175 million was in line with guidance, while adjusted EBIT margins of 21% EPS of <unk> 31, and cash from operations of 40 million finished above the high end of our guidance ranges.

Speaker 2: In Q3, we took strategic actions to advance our transformation into an industrial technology company by announcing the acquisition of a Cornell, Cornell, DBA and the exploration of strategic alternatives for our consumer-mums microphone.

In Q3, we took strategic actions to advance our transformation into an industrial technology company by announcing the acquisition of a Cornell Cornell.

And the exploration of strategic alternatives for our consumer Mems microphone business.

Speaker 2: These actions reflect our ongoing efforts to increase exposure to high growth markets and higher value opportunities.

These actions reflect our ongoing efforts to increase exposure to high growth markets and higher value opportunities.

Speaker 2: Cornell, the Cornell-Dubelia acquisition, which was successfully completed yesterday, bolsters our precision device 70 segment, and is a testament to our commitment to growth, innovation and delivering greater value to shareholders.

Cornell the Cornell <unk> acquisition, which was successfully completed yesterday bolsters, our precision device segment and is a testament to our commitment to growth innovation and delivering greater value to shareholders.

Speaker 2: This transaction significantly expands our serviceable available market through CD capacitor offerings and will enable us to deliver a wider portfolio of products and solutions to both existing and new customers.

This transaction significantly expands our serviceable available market through Cds capacitor offerings and will enable us to deliver a wider portfolio of products and solutions to both existing and new customers.

<unk> end markets are aligned with growth key growth tailwind, including increasing defense budgets med Tech and critical care application growth. They are also well positioned in industrial electrification clean energy and the implementation of next generation fast charging architectures.

Speaker 2: cities and markets are aligned with growth key growth tailwinds, including increasing defense budgets, med-tax and critical care application growth. They're also well positioned in industrial electrification, clean energy, and the implementation of next-generation fast-charging architects.

Speaker 2: We are thrilled to welcome Cornell-Dubilee's talented employees to know and look forward to realizing the tremendous benefits of this transaction for our customers and our shareholders.

We are thrilled to welcome Cornell duly a talented employees to Knowles and look forward to realizing the tremendous benefits of this transaction for our customers and our shareholders.

Speaker 2: The acquisition is expected to be accretive to our EPS in 2024. Importantly, we continue to have a strong balance sheet, allowing us to focus on balancing organic investment R&D and CAPX with accretive M&A will continue to return cash to shareholders through share reports.

The acquisition is expected to be accretive to our EPS in 2024 importantly, we continue to have a strong balance sheet, allowing us to focus on balancing organic investment in R&D and capex with accretive M&A, while continuing to return cash to shareholders through share repurchases.

Speaker 2: Well, we won't be getting into this specifics today relative to the expiration of strategic alternatives of the consumer-mums' micro-business. What I will say is the process is progressed.

Well, we won't be getting into the specifics today relative to the exploration of strategic alternatives of the consumer Mems Mic business, what I will say is the process is progressing.

Speaker 2: Turning to segment results. Precision Advices Q3 Revenue improved sequentially and was down 22% from the prior year.

Turning to segment results precision devices Q3 revenue improved sequentially and was down 22% from the prior year.

Speaker 2: The man weakness associated with excess channel inventory continued in Q3 lead to low manufacturing capacity utilization.

<unk> weakness associated with excess channel inventory continued in Q3, leading to low manufacturing capacity utilization.

Speaker 2: The man has improved since Q2 and we are encouraged by the positive ordering trends in PD as BookDebilt finished above 1 for the first time in 6 quarters.

Demand has improved since Q2, and we are encouraged by the positive ordering trends in PD as book to Bill finished above one for the first time in six quarters.

Speaker 2: We expect orders to continue to rebound in Q4, which gives us confidence in a return to growth in 2024.

<unk> orders to continue to rebound in Q4, which gives us confidence in a return to growth in 2024.

In Med Tech and specialty audio revenue was up 20% versus the prior year as market demand remains resilient.

Speaker 2: In MedTech and specialty audio, revenue was up 20% versus the prior year and market demand remains resilient.

Speaker 2: Based on our projected sequential growth and strong execution over the quarter, we believe we are past the inventory correction we experienced in the first half of 23.

Based on our projected sequential growth and strong execution over the quarter. We believe we are past the inventory correction, we experienced in the first half of 'twenty three.

Speaker 2: We remain confident our ability to grow MSA in 2024.

We remain confident in our ability to grow MSA in 2024.

Speaker 2: In the consumer MEMS microphone business, revenue was up 2% from last year and earnings were slightly better than expected, as consumer electronics markets have stabilized and demand for non-mobile products grew year over year.

And the consumer Mems microphone business revenue was up 2% from last year and earnings were slightly better than expected as consumer electronics markets have stabilized and demand for non mobile products grew year over year.

Speaker 2: We expect you four will be the strongest quarter for CMM this year, including the highest quarter for mobile shipments driven by timing of cost for product launches and improved share of positions.

We expect Q4 will be the strongest quarter for CMS this year, including the highest quarter for mobile shipments driven by timing of customer product launches and improved share position.

Speaker 2: To summarize briefly, MSA continues to perform well when we expect another strong quarter in Q4 with solid momentum heading into 2024.

To summarize briefly MSA continues to perform MSA continues to perform well and we expect another strong quarter in Q4 with solid momentum heading into 2024.

Speaker 2: In PD ordering trends have improved, but due to timing of recovery, margins continue to be impacted by low capacity dualization.

In PD ordering trends have improved but due to timing of the recovery margins continue to be impacted by low capacity utilization.

Speaker 2: With the robust secular trends in defense, medtech, and EB markets, complemented by the Cornell Dupli-A acquisition, we believe we're well-positioned for return to growth in PD.

With a robust secular trends in defense metric and EV markets complemented by the Cornell acquisition. We believe we are well positioned for a return to growth in PD.

Speaker 2: For CMM, consumer electronics markets have stabilized and we expect second half revenues to be up year-over-year. Q4 is expected to be the peak quarter for the year, driven by strong shipments to mobile.

For CMS and consumer electronics markets have stabilized and we expect second half revenues to be up year over year Q4 is expected to be the peak quarter for the year driven by strong shipments of mobile.

In mobile.

Speaker 2: We expect 2024 to benefit from the improving market trends and for CMM to return to full year revenue growth.

We expect 2020 forward to benefit from the improving market trends and forcing them to return to full year revenue growth.

Speaker 2: Well, 2023 has been a challenging year. We are performing well in the second half. On the last earnings call, we laid out a target of 19% adjusted EBIT margins for the second half. Excluding Cornell Dublié, we expect to achieve that target. Although there has been some shift in earnings between Q3 and Q4, our second half EPS is expected to be in line with our previous expectations.

While 2023 has been a challenging year, we're performing well in the second half.

Last earnings call, we laid out a target of 19% adjusted EBIT margin for the second half.

<unk>, we expect to achieve that target.

Although there has been some shift in earnings between Q3 and Q4, our second half EPS is expected to be in line with our previous expectations.

Speaker 2: As we enter the next phase of our transformation into an industrial technology company, I am confident the strategic actions we've taken will drive long-term shareholder value.

As we enter the next phase of our transformation into an industrial technology company I am confident the strategic actions, we've taken will drive long term shareholder value.

Before I turn it over to John I want to highlight the change in our guidance metrics starting in the fourth quarter.

Speaker 2: Before I turn it over to John , I want to highlight the change in our guidance metrics starting in the fourth quarter. We'll be providing revenue, EPS, and cash from operations guidance, which is inclusive of the Cornell Du Bois acquisition.

We'll be providing revenue EPS and cash from operations guidance, which is inclusive of the Cornell <unk> acquisition.

Speaker 2: We believe these metrics are the best measure for our business and are lying to the company's focus.

We believe these metrics are the best measure for our business and our wind to the Companys focus now.

Speaker 2: Now, let me turn the call over to John to detail our quarterly results and guidance. John ? Thanks, Jeff. We reported third quarter revenues of $175 million in line with guidance and down 2% from the year-ago period driven by lower shipments and precision devices.

Now, let me turn the call over to John to detail, our quarterly results and guidance John.

Thanks, Jeff we reported third quarter revenues of $175 million in line with guidance and down 2% from the year ago period, driven by lower shipments in precision devices.

Speaker 2: The precision device segment delivered revenues of $50 million, down 22% from the prior year driven by continued weak demand associated with excess channel inventory in industrial and distribution and markets, and timing of shipments into the defense sector.

The precision device segment delivered revenues of $50 million down 22% from the prior year driven by continued weak demand associated with the excess channel inventory in industrial and distribution end markets and timing of shipments into the defense market.

Speaker 2: Bookings in the quarter were 58 million, resulting in a book to bill ratio of 1.2 per cubic

Bookings in the quarter were $58 million, resulting in a book to bill ratio of 1.2 for Q3.

Speaker 2: In the MedTac and specialty audio segment, revenue is 57 million, up 20% versus the prior year, as demand has returned to more normalized levels.

In the Med Tech and specialty audio segment revenue was $57 million up 20% versus the prior year as demand has returned to more normalized levels.

Speaker 2: Consumer MEMS microphone revenues of $68 million were up 2% versus the prior year, driven by higher shipments into non-mobile applications.

Consumer Mems microphone revenues of $68 million were up 2% versus the prior year driven by higher shipments into non mobile applications.

Speaker 2: Third quarter gross margins were 44.6%, 110 basis points above the high end of our guidance range and up 610 basis points from the same period a year ago.

Third quarter gross margins were 44, 6%, a 110 basis points above the high end of our guidance range and up 610 basis points from the same period a year ago Chris.

Speaker 2: Precision Devices segment gross margins were 40.4%, down 710 basis points from the prior year due to lower factory capacity utilization.

Precision devices segment gross margins were 44% down 710 basis points from the prior year due to lower factory capacity utilization Med Tech and specialty audio segment gross margins were 54, 9% up.

Speaker 2: MedTech and specialty audio segment gross margins were 54.9%, up 700 basis points.

Up 700 basis points versus the prior year drew.

Speaker 2: driven by factory productivity improvements, favorable product mix, and the favorable impact of foreign exchange rates.

Driven by fact factory productivity improvements favorable product mix and the favorable impact of foreign exchange rate changes.

Speaker 2: Consumer MAM's microphones delivered gross margins of 39.9%. Up nearly 16 percentage points versus the prior year, driven by a gain of the sale of assets, lower factory cost, favorable product mix, and higher factory capacity utilization, partially offset by price reductions in the smartphone.

Sumer Mems microphones delivered gross margins of 39, 9% up nearly 16 percentage points versus the prior year driven by a gain on the sale of assets lower factory cost favorable product mix and higher factory capacity utilization, partially offset by price reductions in the smartphone market.

R&D expense in the quarter was $17 million up $1 million from the prior year, driven by higher incentive compensation cost and timing of materials spend partially offset by reduced spending in our CMS segment driven by the benefits of prior year restructuring actions as we continue to shift our focus and.

Speaker 2: R&D expense in the quarter was $17 million, up $1 million from the prior year, driven by higher incentive compensation costs and timing of materials.

Speaker 2: partially offset by reduced spending in our CMM segment driven by the benefits of prior year restructuring actions as we continue to shift our focus and spending to our higher margin business.

Spending to our higher margin businesses.

Speaker 2: S-GNA expenses were 25 million, one million lower than prior year levels, driven by lower sales commissions and incentive compensation cost in precision devices.

SG&A expenses were 25 million $1 million lower than prior year levels, driven by lower sales commissions and incentive compensation cost and precision devices, partially offset by higher professional and legal fees associated with the exploration of strategic alternatives for CMO.

Speaker 3: partially offset by higher professional and legal fees associated with the exploration of strategic alternatives for CMI.

Speaker 3: For the quarter, adjusted even margin was 21%. 520 basis points above prior year levels and 100 basis points above the high end of our guidance.

For the quarter adjusted EBIT margin was 21% 520 basis points above prior year levels, and a 100 basis points above the high end of our guidance range.

Speaker 3: EPS was $0.31 in the quarter, $0.06 above prior year levels, and $0.01 above the high end of our guidance range. Now I'll turn it back over to you.

<unk> was 31 in the quarter <unk> <unk> above prior year levels and <unk> <unk> above the high end of our guidance range.

Now I'll turn to our balance sheet and cash flow cash and cash equivalents totaled $75 million at the end of the third quarter, we generated cash from operations of $40 million above the high end of our guidance range driven by higher adjusted EBITDA and lower net working capital.

Speaker 3: Cash and cash equivalence totaled 75 million at the end of the third quarter. We generated cash from operations of 40 million above the high end of our guidance range, driven by higher adjusted EBITDA and lower net working cap.

Speaker 3: Capital spending was 4 million in a quarter, and we repurchased approximately 900,000 shares at a total cost of food.

Capital spending was $4 million in the quarter and we repurchased approximately 900000 shares at a total cost of $15 million.

Speaker 3: We ended the quarter with cash, net of outstanding bank borrowings of 30...

We ended the quarter with cash net of outstanding bank borrowings of $30 million.

Speaker 3: As Jeff mentioned, future guidance will be provided for revenue, EPS, and cash from operation.

As Jeff mentioned future guidance will be provided for revenue EPS and cash from operations. We believe these financial metrics align best with our long term strategic focus and are the best measure for our business as we transition transition to an industrial technology company.

Speaker 3: We believe these financial metrics align best with our long-term strategic focus and are the best measure for our business as we transition to an industrial technology.

Speaker 3: We expect to hold a virtual investor day to provide updates to our midterm financial targets, capital allocation, addressable markets, and long-term strategy shortly after the completion of our evaluation of strategic alternatives related to the CMM sector.

We expect to hold a virtual investor day to provide updates to our midterm financial targets capital allocation addressable markets and long term strategy. Shortly after the completion of our evaluation of strategic alternatives related to the CMS segment.

Speaker 3: Moving to our guidance for the fourth quarter, which includes the Cornell-Dubley A acquisition, which closed just-

Moving to our guidance for the fourth quarter, which includes the Cornell <unk> acquisition, which closed yesterday revenues.

Speaker 3: Revenues are expected to be between $210 and $220 million, up 9% versus the same period a year ago.

Are expected to be between 210, and $220 million up 9% versus the same period a year ago.

Speaker 3: We're projecting EPS to be within a range of 27 to 31 cents per share. This assumes weighted average shares outstanding during the quarter of 93 million on a fully limited base.

We're projecting EPS to be within a range of 27 to 31 per share. This assumes weighted average shares outstanding during the quarter of $93 million on a fully diluted basis.

Speaker 3: We're projecting cash from operations to range from 40 to 50 million and capital spending is expected to be fired.

We're projecting cash from operations to range from $40 million to $50 million and capital spending is expected to be $5 million we.

Speaker 3: We expect to exit 2023 with approximately 80 million of cash and 286 million of debt, which includes 175 million of borrowings under a revolving credit facility and an interest-free seller note, which was issued in connection with the Cornell-Dubelier acquisition.

We expect to exit 2023, with approximately $80 million of cash and $286 million of debt, which includes $175 million of borrowings under our revolving revolving credit facility and an interest free seller note, which was issued in connection with the Cornell <unk> acquisition, we expect to have.

Speaker 3: We expect to have a net leverage ratio of approximately 1.4 as we exit 2020.

Net leverage ratio of approximately one four as we exit 2023.

Speaker 3: I'll now turn the call back over to the operator for questions and answers portion of the call.

Now turn the call back over to the operator for questions and answers portion of the call.

Operator.

And at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Speaker 1: And at this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad.

Speaker 4: Our first question comes from a line of Bob Labek with CJS Securities. Your line is open. Good afternoon. Next thing, our question. I wanted to start, I guess, just with guidance, and she just kind of ended there. Can you give us a sense of what's included in that guidance from CD? I guess it's two months. Given that it closed yesterday, we just want to confirm that and maybe give us a sense of what, you know, the revenue contribution is there.

Our first question comes from the line of Bob <unk> with CJS. Please.

J S Securities Your line is open.

Good afternoon, thanks for taking our questions.

Yes.

Wanted to start I guess, just with guidance introduced kind of ended there could you give us a sense of what's included in that guidance for the from CV I guess, it's two months given that it closed yesterday, we just want to confirm that and maybe give us a sense of what the revenue contribution is there.

Speaker 2: Yeah Bob, obviously our intent is not to guide by the segment going forward, but I think obviously with the pair, we don't own it the whole quarter. It's about two months. We're expecting roughly about $20 million in revenue from Cardel Dubley.

Yes, Bob obviously, our intent is not to guide by segment going forward, but I think.

Obviously with the peer we don't own the whole quarter. It's about two months, we're expecting roughly about $20 million in revenue from <unk>.

Okay great.

Speaker 4: And then, I mean, it just closed, obviously. Give us a sense of kind of the integration process and timing. And I know when you, you know, purchased it, you mentioned that their margins are lower than your PD, but there's that opportunity potentially to bring those up. So give us, talk about like that opportunity to raise CD margins up to, you know, up to or closer to PD's, you know, historic average.

And then.

Just closed obviously give us a sense of kind of the integration process and timing and I know when you.

Purchase that you mentioned that their margins are lower than your PD, but there's that opportunity potentially to bring those up so give us talk about that opportunity to raise CD margins up to up to or closer to <unk> Historic average please.

Speaker 2: Yeah, just a recon firm about kind of what we said was, you know, that we expect probably roughly about $140 million of revenue next year.

Ah reconfirmed Bob kind of what we said was that we expect probably roughly about $140 million of revenue next year.

Speaker 2: with EBITDA, 25 to $27 million somewhere in that range for EBITDA next year. And there is some pretty significant cost energy that will take some time to get. I think we looked at probably $3 to $4 million of cost energy that we think that we're getting.

With EBITDA, 25% to $27 million somewhere in that range.

For EBITDA next year.

And yes, there is some pretty significant cost synergies that will take some time to get I think we'd looked at probably $3 million to $4 million of cost synergies that we think that we get when we didn't detail too much about was revenue synergies I think there are going to be some revenue synergies with Cornell will probably go into little bit more details at the Investor day.

Speaker 2: What we didn't detail too much about was revenue synergies. I think there are going to be some revenue synergies with with Cornell. We'll probably go into a little bit more detail of that at the investor day. But, you know, I think we would expect some of these revenue synergies to start showing up in the back half of twenty twenty four.

I think we would expect some of these revenue synergies to start showing up in the back half of 2024.

Speaker 4: Okay, great. And then last one for me, I'll jump back in queue. Just, if you mention the analyst day, just to be clear, and allow your colleagues to really come to the office and invite them to the office. And fantastic, Dr. Kim has sent another arrest token of his offence before me. Wonderful, okay?

Got it okay, great and then last one for me I'll jump back in queue. Just you mentioned in the analyst day.

Just to be clear when you.

Speaker 4: conclude the CMM process or

Conclude the CMS process or.

Speaker 4: How was it? Will you have soul? Yes.

<unk>.

How is it will you have sold that will you have.

Speaker 2: Yeah, I think that's a question we anticipate getting, you know, we kind of put that in John's script. But I think the best way to put this is, I think we need to have some clarity on the outcome of the strategic alternatives process.

Yes.

I think that's a question we anticipate getting there we'd be kind of put that in John's script, but I think the best way to put this is I think we need to have some clarity on the outcome of the strategic alternatives process, Yes, I don't have a firm date on when that's going to be complete and so but I think it probably is really we kind of view it from our perspective is.

Speaker 2: You know, I don't have a firm data on when that's going to be complete. You know, and so, but I think it probably is really, we kind of view it from a perspective is we got to have a, kind of a, a, a clarity around the outcome of that process. Now, what that means in clarity, you know, and there's a lot of different outcomes here. I don't want to speculate on what the outcomes could be, but I think, you know, in order to start giving, you know, new midterm targets, we really got to know, you'll kind of what the situation is relative to strategic altters with the microphone business. But we are progressing. But we are committed to progressing. I mean, we are making progress.

We got to have a kind of a <unk>.

Clarity around the outcomes of that process now what that means and clarity and theres a lot of different outcomes here I don't want to speculate on what the outcomes could be but but I think in order to start giving new mid term targets. We really got to know kind of what the situation is relative to strategic alternatives with the microphone business, but we are progressing but we are but it is progressing.

We're making progress.

Okay Super Thanks, so much.

Speaker 5: Thanks so much.

Speaker 1: And your next question comes from the line of Christopher Roland with Susque Hanna, your line is open.

And your next question comes from the line of Christopher Roland with Susquehanna. Your line is open.

Speaker 6: Hey guys, thanks for the question. Perhaps you can talk about PD, how you see inventory there, are we?

Hey, guys. Thanks for the question.

Perhaps you can talk about PD.

How you see inventory there are we are we almost done with the clear out there.

Speaker 2: Are we almost done with the clear out there? Also, anything else you wanna talk about? Pricing, order trends, et cetera? We'd love to know, yeah. Yeah, I mean, I think from our perspective in the PD business and also within the MSA business, the pricing's been very, very stable. I mean, we don't think there's any issues relative to pricing in these markets.

And also anything else you.

Wanted to talk about.

Pricing.

Order trends et cetera would love to know yes, yes.

From our perspective in the PD business and also within the MSA business. The pricing has been very very stable.

We don't think theres any issues relative to pricing in these markets.

Speaker 2: What I would say first on the MFA side is, you know, the market continues to be very resilient and strong in the hearing health market.

What I would say first on the MSA side is.

The market continues to be very resilient and strong in the hearing health market.

Speaker 2: Um, and, you know, and we, we're, you know, we're very excited about 2024 position for new products with our customers.

And we are very excited about 2024, our position for new products with our customers the growth of the end market, we feel pretty good we don't see any inventory issues in this market today.

Speaker 2: growth of the end market, we feel pretty good. We don't see any inventory issues in this market today. And in fact, I just make the comic Chris that there's kind of like this, although we've been kind of

And in fact, I would just make the comment Chris that there is kind of like this although we've been kind of tamping down.

Speaker 2: tamping down what the belief is about over-the-counter, well, we're not seeing great pickup in over-the-counter demand. There is starting to be, with our customers and the market, a belief that the marketing of over-the-counter hearing aids is actually drawing more people into the traditional channels than would have normally come in.

What the belief is about over the counter while we're not seeing like great pickup in over the counter demand there is starting to be kind of like with our customers in the market I believe that the marketing of over the counter hearing AIDS is actually drawing more people into the traditional channels than would have normally come in and so we feel pretty positive about the MSA.

Speaker 2: So we feel pretty positive about the MSA business.

Our business on the BD side, I would say, it's a little bit more of a mixed bag, but here's what I would say is that we had a book to bill above one for the first time in six quarters and I bring that up.

Speaker 2: On the PD side, I would say, you know, it's a little bit more of a mixed bag, but here's what I would say, is that, you know, we had to book the bill above one for the first time in six quarters. And I bring that up, I mean, that's a pretty big step. Now, I will say, you know, a significant amount of the orders that we saw in Q3 were from defense.

That's a pretty big step now I will say.

Significant amount of the orders that we saw in Q3 were from defense, which typically are not short borders like they are typically longer term orders that we deliver over sometimes a year year and a half now.

Speaker 2: which typically are not short borders, like there are typically longer term orders that we deliver over sometimes a year, year and a half.

Speaker 2: Now, all this being said, you know, I'd say, you know, if we look at a 24, I think, you know, defense looks pretty good. The med business in EV look pretty good. You would think the, you know, the long term of those businesses or markets looks pretty good. But one I think it's probably the least clarity on yet is industrial distribution.

Now all that being said I would say we look at the 24 I think defense looks pretty good the.

The med business and EV look pretty good.

The long term.

<unk> businesses are market looks pretty good but one I think it's probably the least clarity on yet is industrial and distribution and it does remain weak the bookings remained weak in this portion of the business.

Speaker 2: And it does remain weak. The bookings remain weak in this portion of the business, and the shipments remain weak.

And the shipments remain weak now we're listening to align with what a lot of other people are saying we are seeing the work down in our distribution channel. We think the inventory of what they've got we're starting to see it work down but I think overall, we feel pretty good about growth for 2024, and the peak in the BD business and I think the other side of this is.

Speaker 2: Now, we're listening to a lot of what a lot of other people are saying. You know, we are seeing the work down in our distribution channel. We see the inventory of what they've got. We're starting to see it work down. But I think, you know, overall, we feel pretty good about growth for 2024 in the PD business. And I think the other side of this is, you know, once we get back to growth, the capacity utilization will improve and the margins will return back to a more, like, normalized level that we saw when the business was growing.

Once we get back to growth the capacity utilization will improve and the margins will return back to a more normalized level that we saw.

When the business was growing.

Speaker 6: Yeah, the Industrial weakness I would say is going around no surprise there.

Yeah, the industrial weakness I would say is going around no surprise there.

The.

Speaker 6: It's a very solid December guide, and without guiding Mark, perhaps you can just give us the broad puts and takes, given you're de-emphasizing consumer, and so I don't think...

Yeah.

It's a very solid December guide.

And without guiding March perhaps you can just kind of give us the broad puts and takes given they were kind of deemphasizing consumer and so I don't think kind of seasonal trends will hold there. If you could talk about it more broadly and what to kind of expect there would be good yeah.

Speaker 2: kind of seasonal trends will hold there if you could talk about it more broadly and what to kind of expect there will be good. Yeah, so let me start with the concern that you know, seasonally

Let me start with the consumer business Youll seasonally Q1 is typically down.

Speaker 2: Q1 is typically down after launches in mobile, so I think we'll continue to see a trend like that, that in Q1 mobile will be, CMF will be down.

Launches in mobile so I think we'll continue to see a trend like that in Q1 mobile will be <unk> will be down.

Speaker 2: I would also say that, you know, that we're having a very, very strong quarter in Q4 for Hamise. It will be down sequentially, but I think the theme around the CNN business and the MSA business is, year over year there will be significant growth because if you remember, Chris, we had a very weak Q1 of 23. So, you know, there should be some pretty significant growth year over year.

I'd also say that.

We're having a very very strong quarter.

In Q Q4 for MSA, it will be down sequentially, but I think the theme around the <unk> business and the other day businesses year over year, there will be significant growth because if you remember Chris we had a very weak Q1 of 'twenty three so there should be some pretty significant growth year over year.

Speaker 2: The PD business, you know, here's what I kind of would frame it is, is, you know, I would sit there and say we're probably going to be...

The PD business, Here's I would frame it as is.

The darn thing, we're probably going to be.

Speaker 2: flattish year over year in Q1 for PD excluding Cornell. Right, so and obviously the Cornell will add, just think of it, we said about 140 million, it's probably a little bit more back end loaded than front end loaded, but you can get to a number there to see kind of what Cornell will be generating. But overall, I think, Chris, what we kind of feel is Q3 will kind of encourage that, bring a new ability into right handed

Laddish year over year in Q1.

Sure.

For PD, excluding Cornell right. So obviously, the Cornell will add just think of it we said about $140 million is probably a little bit more backend loaded than front end loaded, but you can get to a number of their disease kind of what Cornell will be generating.

But but but overall I think Chris what we kind of feel it Q3.

Speaker 2: without Cornell, we're flatish the year over year. So we feel pretty good about that considering everything that's going on in the marketplaces. And then Q1, we're having some EPI cops and Q1 of 23, we should see some significant growth and then on top of that, add in the Cornell number as well.

Without Cornell were flattish year over year, So we feel pretty good about that considering everything that's going on in the marketplaces, and then Q1 with having a <unk> of.

Some easy comps in Q1 of 'twenty three we should see some significant growth and then on top of it add in the Cornell number as well.

That's very helpful. Thank you guys.

Speaker 1: And your next question comes from the line of Anthony Stoss with Craig Hallem Capital, your line is open.

And your next question comes from the line of Anthony Stoss with Craig Hallum Capital. Your line is open.

Speaker 5: Good afternoon, guys. Maybe more for John . In terms of total op-X and gross margins for the December quarter, could you give us kind of your thoughts? You said for the Q-

Good afternoon guys.

Maybe more for John in terms of total Opex and gross margins for the December quarter could you give us kind of your thoughts.

You said for the for Q4 Tony.

Yes.

Speaker 3: Yeah, so, you know, again, we're kind of moving away from gross margin, really focusing on operating margin with its transformation to industrial tech. You know, what I'll say is, you know,

Yes so.

Again, we're kind of moving away from gross margin really focusing on operating margin with its transformation to industrial tech.

What I'll say is.

Q Q3 had some one time benefits that were in both gross margin and operating margins that were <unk>.

Speaker 3: Q3 had some one-time benefits that were in both gross margin and operating margins that were fixed assets sale. We had roughly $5 million. We also had, I'll call it an NRE recovery of a couple million dollars. That is not going to recur in Q4, so you'll see margins going down sequentially.

Fixed asset sale, we had roughly $5 million. We also had I'll call. It an NRA recovery of a couple million dollars that is not going to recur in Q4, so you'll see margins going down sequentially.

Okay.

Speaker 3: Okay, but just on OPEX, I know it's only two months. Yeah, from an OPEX standpoint, Tony, we've ran, you know, I think a couple times I've talked about kind of 43 to 45 million run rate. We've been a little lower than that. We will jump up with the Cornell Dublié acquisition slightly, but...

Opex I know, it's only two months from an Opex standpoint, Tony we've Randall.

I think a couple of times I've talked about kind of 43 to 45 million run rate, we've been a little lower than that we will jump up with the Cornell <unk>.

Vision slightly but.

Speaker 3: You know, I would say for the core business that 43 to 45 million are under eight, you know, we're right there. Could be a touch lower than that. And then, and then I top of that, adding in the CD. CD is roughly 20 to 25 million annually in an operating expense.

I would say for the core business that $43 million to $45 million run rate, we're right there could be a touch lower than that.

And then and then on top of that adding into CV CD is roughly 20% to $25 million annually.

And operating expenses.

Okay got it.

Speaker 7: Okay, got it. Um, and then if you guys were to, it seems like things are picking up bookings on PD if you were just to look at knows prior to CD. You would you expect total revenue growth in 2024 over 2023. Jeff.

And then if you guys were to it seems like things are picking up.

<unk> Zhan PD. If you were just to look at Knowles prior to CD.

Would you expect total revenue growth in 2024 over 2023, Jeff.

Speaker 2: Well, I mean, I'm not going to predict the full year at this moment, but I would just say that there's a Q1 will definitely be up year over year in that counting

I'm not going to predict the full year at this moment, but I would just sit there and say it is Q1 will definitely be up year over year, not counting <unk> I would say that's kind of what the other thing I'd step out it's a little early to start projecting the full year, but I think we're going to start out very well in Q1.

Speaker 2: I would say that's kind of what the thing I step out knew. It's a little early to start projecting the full year, but I think we're going to start out very well in Q1. Going back to kind of what I answered in the other one of the other questions, which is, you know, in the microphone business, as well as the MFA business, we expect some pretty strong year-over-year growth in Q1. I would say the PD business is still, I would say, flatish, and then add on top of it, the CD revenue.

Going back to kind of what I answered in the other one of the other questions which is.

In the microphone business as well as the MSA business.

Expect some pretty strong year over year growth in Q1, I would say the PD business is still I would say flattish and then add on top of it.

The CD revenue.

Speaker 7: Got it. Then speaking of CD, I'm curious if you can share some light on where they stand in which way. Why?

Got it and then speaking of CD.

I am curious if you can share some light on where they stand inventory wise similar to Knowles physician theres still a little bit to be worked off or what kind of commentary can you give us on Cds inventory.

Speaker 7: Similar to Noel's position, there's still a little bit to be worked off, or what kind of commentary can you give us on CD's inventory?

Speaker 2: Yeah, I think there's seen a lot of the same thing in their distribution portion of the business.

I think theyre seeing a lot of the same thing in their distributions portion of the business.

Speaker 2: Just remember, this is quite a bit more distribution business, about 50% of their revenue goes through distribution, and they are still seeing the same thing. But here's what I would add. Their OEM business, their direct business, is actually holding up a little bit better than the PD business. The reason I say this is, remember, we've had these kind of pushouts on defense.

And just remember this is quite quite quite a bit more distribution business.

About 50% of our revenue goes through distribution and they are seeing the same thing, but here's what I would add.

There are OEM business, our direct business is actually holding up a little bit better than the PD business.

The reason I say this is remember we had these kind of push outs on defense Youll relative things like Lockheed which we've talked about in previous quarters. They are a fair amount of business in what I would call electrification clean energy Med Tech and it seems to be holding up pretty well there are OEM business. So that's kind of like kind of a little bit offsetting so we're not seeing.

Speaker 2: You know relative things like Lockheed which we've talked about in previous quarters

Speaker 2: They have a fair amount of business in what I would call electrification, clean energy, medtech, and it seems to be holding up pretty well, their OEM business.

Speaker 2: So that's kind of like, kind of a little bit offsetting. So we're not seeing overall quite the decline that we saw in the PD business.

Overall quite the decline that we saw it in the PD business. So I think in the distributions slash industrial portion of the business. Yes, we are still seeing similar things.

Speaker 2: So, you know, I think in the distribution slash industrial portion of it, yeah, we're still seeing similar things.

Speaker 7: And the last question for me, John , you made a comment about your CMM business going to be pretty strong in Q4. Was there a different change in those thinking on how much business you'll take for the December quarter within, say, smartphones or just in consumer in general?

Got it and then last question for me.

John you made a comment about your <unk> business is going to be pretty strong in Q4 was there.

A different change in Knowles thinking on how much business you will pay for the December quarter within say smartphones are just in consumer in general.

Speaker 2: Just repeat. I think we had some pick up within this PMM business. Yeah, I'm not going to go to detail by customer, but we have seen an increase we think is share in the mobile business in Q4. And to the extent, I would say the positive is, we get a lot better capacity utilization, we get more revenue, but incrementally in the CMM business, the margins are not as high in the mobile portion of the business. Got it, thanks guys. Appreciate it.

Just repeat that.

We had some pickup in the CMS business, yes, I am not going to go detail by customer, but we have seen an increase we think its share in the mobile business in Q4.

To the extent I would sit there and say the positive is obviously, we get a lot better capacity utilization, we get more revenue, but incrementally in the <unk> business. The margins are not as high in the mobile portion of the business.

Got it thanks, guys I appreciate it.

Okay.

Speaker 8: And again, if you would like to ask a question, please press the star and number one on your telephone keypad. Our next question comes to the line of Tristan Jira with Brit, sorry, Fared, your line is open. Thank you. Quick questions again on the PD business. You mentioned that the bucket of weakness with still industrial and dusty is it fair to assume it's about?

And again, if you would like to ask a question. Please press the star and number one on your telephone keypad. Our next question comes from the line of Kristen <unk> with Brett.

Alright Baird your line is open.

Thank you a quick questions again on the on the PD business you mentioned that.

The bucket.

We can actually scale industrial and <unk> is it fair to assume it's about.

Speaker 8: one third of your precision devices business. And what do you see in some of the other segments, including automotive, which I think in the past was maybe about 10% of your PD business, is that slowing any additional color on the various end markets within that business?

One third of precision devices business.

What do you see instead of the other segments, including automotive, which I think in the past was maybe about 10% of your PD business is that slowing any any additional color on that.

The various end markets within that business, Yeah, I would sit there and say, yes, the industrial distribution parts of the business is probably a little bit less than a third of the business.

Speaker 2: Yeah, I would sit there and say, yeah, the industrial distribution portion of the business is probably a little bit less than a third of the business, but it is down pretty significantly year over year. That's the biggest weak point. I think we've talked a little bit about defense. It will be down nowhere near kind of what we, what do you call it, have in industrial and distribution, but more on the timing of orders than anything else.

And it is but it is down pretty significantly year over year.

The biggest week point, I think we talked a little bit about defense it will be down nowhere near kind of what we have in industrial.

In distribution, but more on the timing of orders than anything else, our automotive visits still will be up.

Speaker 2: Our automotive business still will be up, you know, it's, you know, obviously from a small base.

It's obviously from a small base.

Speaker 2: you know we're you know we have talked about uh... fifteen to twenty million dollars and twenty three of revenue will be you know firmly in the middle of that range uh... for automotives here uh... with some nice growth uh... year over year

We had talked about $15 million to $20 million 23 of revenue will be firmly in the middle of that range for automotive this year with some nice growth year over year.

Speaker 8: Okay, great. And then...

Okay, Great and then.

I know that Youre holding commentary on that.

Speaker 8: I know that you're holding commentary on your human business, depending the review. Just what is the willingness to...

<unk> business pending the easiest.

What is the willingness to reduce the top line.

Speaker 8: reduce the top line as you potentially restructure that, or take any other actions relative to what would be a gross margin, a creative event. And how do you mitigate, which is what some other companies have done, reducing production and asserting current underutilization charges, but at the same time, avoiding inventory bail. Just trying to look at.

You potentially restructure that or take any other actions relative to what will be gross margin accretive event.

And how do you mitigate which is with some other companies have done.

Are you seeing production and as such incurring underutilization charges, but at the same time avoiding inventory bill just trying to look at.

Speaker 8: at a high level how things could look like or how your willingness to change the business model in that regard in terms of how drastic that could be in terms of a top line and gross margin impact.

At a high level of how things could look like or how is your willingness to to change.

Not only and in that regard in terms of how do I take that could be in terms of topline and gross margin impact.

Speaker 2: Yes, well, let me just make the first point. If you remember back, middle of 2023.

Well, let me just take the first point.

If you remember back up middle of 2023, we took some pretty significant action relative to <unk> I'm, sorry, middle of 2020 to some pretty significant action in this business taking out about $30 million worth of cost combination of both opex and cost of goods sold obtained.

Speaker 2: We took some pretty significant action, relative to the two. Sorry, middle of 2022, some pretty significant action in this business, taking out about $30 million worth of cost, combination of both.

Speaker 2: and cost a good soul, a team cost out, fixed overhead. And so I think for now, we're kind of where we want to be until we're actually running.

Our fixed overhead and so I think for now we're kind of where we want to be until we're actually running pretty close to capacity in the back half of the year. In this business right now I think what were kind of hopeful for that we see as the opportunity in this business.

Speaker 2: pretty close to capacity in the back half of the year in this business right now. I think what we're kind of hopeful for that we see at the opportunity in this business, you know, obviously we're going to the strategic alternative processes is that as the non-mobile portion of the business grows, which is significantly higher margin, the mixtures will help significantly over the next 12 months, 18 months. And we'll...

Obviously, we're going through a strategic alternative processes is that but non mobile portion of the business grows which is significantly higher margin.

Mix shift will help significantly over the next 12 months 18 months and Nash.

Speaker 2: naturally be able to take less mobile business as we fill in our capacity with higher gross margin

Naturally be able to take less mobile business as will be filling our capacity with higher gross margin business.

Speaker 2: I really don't see us taking any further action in this business until we get to the conclusion of strategic alternatives on what can happen with the business.

We really don't see us taking any further action in this business.

Until we get to the conclusion of strategic alternatives on what what's going to happen with the business.

Great very interesting.

Thank you very much.

Speaker 1: And there are no further questions at this time. This concludes today's conference call. You may now disconnect.

And there are no further questions at this time. This concludes today's conference call you may now disconnect.

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